Oklahoma State of the State: Governor Fallin Delivers Stern Tax and Spend Message

Individuals and businesses will bear the costs of the numerous tax hikes forced through at the governor’s insistence.

Oklahoma Governor Mary Fallin’s final State of the State Address focused almost exclusively on whipping up support for a plethora of tax hikes. She applauded the “group of business and community leaders” working “tirelessly in a bipartisan manner to sculpt a series of budget and reform compromises.” Variations of this “Step Up Oklahoma” tax hike plan repeatedly failed to garner the requisite three-fourths supermajority vote for passage before legislators finally acquiesced weeks later to a $460 million tax hike on cigarettes, gasoline, diesel, and oil and natural gas production.

Teachers’ union demands for a $10,000 pay hike under threat of a walkout fueled the drive for these tax hikes. As a result of the enacted package, pay is set to increase by $6,100 per teacher. With this increase, Oklahoma is 31st highest in teacher pay, a big jump from 2nd lowest. However, an incomplete picture arises from simply focusing on teacher pay comparisons without taking into consideration cost of living adjustments. For instance, the cost of living is nearly 12 percent less in Oklahoma City compared to Phoenix and 24 percent less compared to Miami. Incidentally, statewide teacher pay prior to the $6,100 increase was 4.6 percent less in Oklahoma compared to Arizona and 8.4 percent less compared to Florida. Cost of living surely alters the analysis. Despite the giant pay raise, teachers still walked out days later demanding more.

Failure to rein in spending over the longer term has total Oklahoma state expenditures (inclusive of general fund, other state funds, and bond revenue) hit a seventh consecutive record of $16.13 billion in FY2017 and may hit an eighth consecutive record in FY 2018. According to the Kaiser Family Foundation, the state of Oklahoma spent more per-capita (including federal funds) in fiscal year 2016 than 19 other states. In fact, for every $1 per capita spent by Texas, Oklahoma spent $1.31.

Despite early promise of being a bold reformer, the governor now zealously possesses the tax and spend mantle. And the spending extends beyond education. She promises a cornucopia of spending courtesy of the tax hikes on “initiatives that each of you are passionate about.” In particular, she asked legislators to “remember all the road and bridge construction you’ve seen across the state and the good image it gives Oklahoma when we invest in its infrastructure.” According to Reason Foundation’s 23rdAnnual Highway Report, Oklahoma spends more funds per state-controlled highway mile ($188,912 annually) than five of its neighboring six states. All five of the lower-spending states rank higher in overall highway performance. Perhaps enhanced efficiency in transportation spending should be sought before resorting to additional fuel taxes.

These tax increases will potentially drop the state to 21st in the Rich States, Poor Stateseconomic outlook ranking from 16th today. Cigarette taxes nearly doubled overnight from $1.03 to $2.03 per pack, soaring from 35th in the nation to 14th highest, nearing the ranks of high-tax states such as Maryland, California, and New Jersey. Each Oklahoma taxpayer who smokes half a pack per day could save $330 annually by purchasing cigarettes in Missouri or by simply purchasing online or on reservations managed by Native American tribes. Diesel taxes jumped by 6 cents per gallon diesel and gasoline taxes by 3 cents per gallon. A family with two diesel vehicles filling up once each week could forfeit an additional $100 per year, thanks to this $0.06 per gallon tax increase.

In addition, legislators more than doubled the gross production tax on many oil and gas wells from 2 percent to 5 percent. This threatens to place Oklahoma energy producers at an economic disadvantage. Although several leading energy-producing states impose severance taxes, such as Texas and Wyoming, these competitors refrain from levying the egregious corporate tax rate anywhere close to Oklahoma’s new tax rate (2.56 percent and 0 percent, respectively). Making production artificially more expensive in Oklahoma creates an incentive to devote limited exploration and production capital—and the related jobs—elsewhere. This possible shift in production could mean revenue projections fall short of expected revenue increases.

“Just as compromise formed the foundation of America, I believe compromise can fortify the foundation of Oklahoma,” explained the governor. But students of history will recall that a tax on tea by King George III sparked Boston Tea Party. The tax hikes embraced by the governor and passed into law go far further than a few pennies tax on an English beverage. Considering politicians in D.C. just managed to enact the most substantive tax cuts in more than 30 years, the governor’s admonition that “we don’t want to be like Washington, D.C.” is mildly ironic.

Rather than enacting these tax increases, spending reforms such as those contained in ALEC’s State Budget Reform Toolkit will enhance the Sooner State’s economic competitiveness. For now, individuals and businesses will bear the costs of the numerous tax hikes forced through at the governor’s insistence.

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace …